{ 11 comments… read them below or add one }

Curious Cat Investing Blog November 13, 2008 at 6:23 pm

401(k)s remain a great tool to aid your financial future. The market will go up and down and paying attention to asset allocation is important especially as one nears retirement. But the biggest problem people face for their retirements today is not the decline in their appropriate retirement savings but their failure to save what is required in the first place. People need to add to their 401(k) not be scared of them. And they need to learn how to manage those assets throughout the rest of their life.

DES November 14, 2008 at 5:15 am

Our 401K is depleted. We will just leave it for now and wait for the market to turn. We thought we were doing everything right but c’est la vie!

aunt mommy November 14, 2008 at 7:09 am

I disagree with the assessment that only folks retiring or near to retirement are most hurt by the current downturn and its affect on our 401k balances.

This can hurt anyone who might need to access their funds soon – either to split in a divorce proceeding, roll out for living expenses (not a good idea but still sometimes necessary), or who have left one job and have a narrow timeframe in which to do something with their 401k.

Reallocate or rebalance your investment portfolio over time.

Although long term employment is not “the norm” anymore for a lot of people, some people do stay with the same company and the same 401k plan for a number of years. As a result, some people feel “stuck” – once it is in the 401k you can’t do anything else. You set your allocations and just have to grit your teeth and ride it out.

And if it’s all down, it may feel as if there are no safe choices.

But if you read your documents carefully, it may turn out (as some of us have found out too late) that you are allowed to withdraw some money with no penalty to roll into another investment for retirement. Without waiting for an event such as a job change.

Additionally, while you cannot allocate your deposits straight to a money market account, a number of funds do let you “cash out” of one investment into a money market account. (Note that some funds have a penalty for holding shares of the fund for less than X days.)

While today might not be the best day to dump everything that’s down %40 YOY and roll it into your 401k’s MM fund paying 2%, it’s good to know that if you feel we hit another bubble in a decade or so from now, you can.

kitty November 15, 2008 at 7:11 pm

Pretty good summary. A couple of things I’d like to add about “safe” options.

a. Most 401K offer something called “stable value”. This is usually the safest option, although you should still read the details to see where this fund invests the money in this fund.

b. “Most of them apparently weighted their plan with stocks, rather than with safe investments like bonds.”
When one thinks about bonds one need to keep in mind the bond funds that our 401K offer aren’t the same as individual bonds. Bond funds can go up or down.

When you buy an individual bond, you buy a fixed income investment that pays you a specific fixed interest and “promises” to return you your principal when due – i.e. on the date when the bond is matures. Different individual bonds carry different risk. Government bonds are safer than CDs as they are guaranteed by the full tax power of the US government. Among other bonds – corporate and municipal you have to check the rating (AAA is the safest; municipal are normally safer than corporate) and the issuer (how healthy you think the company is) to see how safe or risky the investment is.

While bonds come with a promise to repay you the principal at the time of maturity, the value of the bond between now and maturity can fluctuate. For example, when interest rates go down, the bond values normally go up; when the interest rates go up, the value of bonds go down. There are other cases – like during this credit crisis the values of bonds on the secondary market dropped. But if the company whose bond you have didn’t go bankrupt, you can still collect your interest and you will still get your full principal at maturity date.

Bond funds are different. Bond funds are NOT fixed income investments. They have a number of bonds each with different maturity date. When you buy into bond funds, the fund buys bonds for you at the secondary bond market at current values. When you sell your bond funds, you sell bonds at the secondary market. If the value of bonds dropped, so did the value of your investment. If at some point in future we’ll have higher interest rates, all bonds will cost less. This loss may in part be compensated by higher interest paid on new bonds your fund will buy when some of the old bonds mature, but you may have to wait to recoup your losses.

So it is a mistake to think that the money you invested in a bond fund are safe. The only exception is if the bond invests only in I and EE government bonds — these bonds aren’t sold on secondary market, so their value doesn’t fluctuate.

Pension Princess November 15, 2008 at 7:41 pm

Great writing! You might really like this site too. It gives a top-down on 401ks.


Brentos November 16, 2008 at 10:56 pm

From above: “the only people who are hurt right now are those who were thinking of retiring”

If you look at some of the long term graphs in the average medium risk 401k you can see broad fluctuations, and some extreme fluctuations and corrections in the high risk portfolios.

In the end, if you have another 20 years before retiring, just close your eyes stay in for the ride.

We’ve lost over 45,000 since the downturn is September, but what do you do?


BlogLender November 16, 2008 at 10:59 pm

Up or down, the only people that need to worry are the people who are on the verge of retirement. My wife and I just lost $45,000 in the last few months…..we’re only in our mid 40s in age though.

Web Wizard November 17, 2008 at 1:53 pm

I realize some people are simply not cut out for freedom, personal responsibility, or thinking and need socialism to survive. I am all for that as long as they aren’t taking from to me to support them and as long as I don’t have participate. I like the feeling of being the one in charge and not having to depend on my *benevolent* government for anything.

I leave everyone else and their money alone I only ask for the same courtesy.

George November 30, 2008 at 3:43 pm

Thanks for submitting this post for the upcoming Festival of Stocks. Please consider supporting the Festival of Stocks by volunteering to host an upcoming edition. See http://www.valueinvestingnews.com/festival-of-stocks for details. Contact me if you can help.

Rose December 31, 2008 at 2:48 am

While running for President, Obama proposed to temporarily remove the 10% penalty for hardship withdraws from IRAs and 401(k)s. You would be able to withdraw up to 15% of your plan or $10,000. However, don’t forget that you will still have to pay income taxes on the withdraw. They will automatically withhold 25%.

Independent Investment Advisor September 17, 2010 at 9:56 am

“After all, how great is a 401k that isn’t available to you when you retire because it’s collapsed in value just when you need it most? Or because you raided it during your last emergency? ”

Probably even MORE true today than when you originally posted it… sadly.

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